At 8.2%, India’s June quarter (Q1) GDP (gross domestic product) estimates for fiscal year 2019 may indicate that finally the after-effects of demonetisation and a messy implementation of the goods and services tax (GST) are behind us.

But does the same hold true for small and medium-sized enterprises (SMEs), which form a significant part of the country’s informal economy?

Since GST implementation came close on the heels of demonetisation, SMEs were among the worst hit. Although it has been more than a year now, these firms haven’t recuperated from this twin blow yet. Their profit and sales growth haven’t recovered, consequently impairing their ability to hire.

It should be noted that the GDP data does not capture the contribution of the informal economy given the data collection-related constraints to measure their performances.

In the circumstances, survey-based measures become important. The Crisil-Sidbi MSE Sentiment Index, a quarterly survey conducted by ratings agency Crisil Ltd and SIDBI (Small Industries Development Bank of India) showed that although business sentiment has improved, new job additions have remained tepid.

In the April-June period, nearly 79% of the respondents reported that their employee base remained unchanged, while 17% added more staff. Only 4% either let go or did not replace outgoing employees, it showed.

The sample is a diversified one of 1,100 MSEs with revenue of up to 25 crore across industries.

However, the situation is improving. In July-September, 71% MSEs intend to continue with their current employee base with no net additions, while only 3% foresee a reduction and 26% said they intend to hire, added the survey.

“Sectors with relatively subdued hiring are food products, textiles, healthcare, logistics and metals & mining, while few players in construction and leather & leather goods reported reduction in employee base," said R. Vasudevan, senior director for SME Ratings at Crisil.

Similarly, while the key benchmark indices are regularly scaling new peaks, a large number of mid-cap and small-cap companies continue to trade in the red.

A CARE Ratings Ltd’s analysis of 700 listed companies showed that those in the 50-100 crore, 100-250 crore and 500-1,000 crore sales slab reported negative employment growth in FY18. On the other hand, large companies with an annual turnover of 1,000-5,000 crore saw better employment growth (see chart).

This is said to be a fallout of dismal sales growth.

“Growth in sales was muted for these companies and hence did not result in more hiring. Companies at the lower end had to rationalize staff especially when production activity was affected by both demonetisation and GST which made them scale back operations. Even in Q1FY19 companies with less than 100 crore annual turnover witnessed negative sales growth," said Madan Sabnavis, chief economist at CARE Ratings.

While demand conditions have improved, many small-sized firms are still struggling to meet their increased working capital needs. So, economists are not too convinced about the ability of SMEs to generate employment at least in the near term.

In short, small is still not beautiful and it may remain so for a while.